Monday, June 9, 2008

Lehman Lower As Numbers Surprise

The devil, it would seem, is in the details. Wall Street has been forecasting that Lehman Brothers (LEH) would record its first quarterly loss as a public company. Check. Reports said the bank would need to raise new capital to augment the $8 billion its raised since February. True enough, the firm said Monday. The market expected that both numbers would be big, and ugly - sure enough - and that, like most of the other investment banks, the sheer act of demonstrating that it could absorb stiff losses and still find an appetite for its securities would be reason enough to convince those investors to buy the shares. But, no, not this time. Lehman Brothers put up a preliminary version of its second-quarter results that showed losses proved stunningly steeper than Wall Street had been expecting - a net loss totalling $2.8 billion, or about $5.14 a share, versus forecasts of a loss of just 13 cents - and raising questions about the bank’s ability to post a full-year profit. Perhaps even more frightening, Lehman said it would tap the capital markets for another $6 billion in capital - twice the total that had been talked about when rumors of Lehman’s requirements for fresh capital first started to gain traction last month, and higher still than the $5 billion that Wall Street had been talking about as recently as last week. Both the scope of the losses and the surprisingly expansive capital needs sparked fresh worries about the integrity of Lehman’s balance sheet. While investors probably don’t have to fret about Lehman’s ultimate solvency - a stark contrast to the consequences that the old Bear Stearns found itself in back in February, before the Federal Reserve effectivley promised to keep even capsizing banks afloat - there are new risks to Lehman’s ability to attract and maintain parties who will get on the other side of its trades. Moody’s cut its outlook on the debt for the second time this year, and now has a negative rating, despite the fact that Lehman has boasted that its common- and preferred-share offering has been wildly over-subscribed. Shares have fallen 7% in premarket action, and the stock, which traded at a low of $20 a share back in March, threatened to fall back below $30 a share for the first time in nearly three months. The conference call slated for an hour hence promised to hold some drama.


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